Taking counsel: So you are not paying your mortgage to the bank. What may you expect?

  • 2009-04-30
  • By Elina Rubeze [Kronbergs & Cukste]
Under the current economic climate, it is not unusual for debtors to face difficulties meeting their mortgage payments. What are some of the likely scenarios in terms of creditor responses?
If the borrower cannot agree with the creditor on a plan, it may be that the creditor will seek to act upon the security.

A mortgagee may seek various collection mechanisms, including: 
a) Sale by auction on the application of the mortgagee to a court, which will in turn authorize the auction by a court bailiff;
b) Forced sale pursuant to a court order or arbitral award on execution of judgment.

For a mortgagee to make a court application for sale by auction, the mortgage must contain language allowing the sale of the real estate by the mortgagee at an unfettered price. In both cases the real estate may be sold only on auction with the sale results to be approved by court. The auction must be conducted by a sworn-in court bailiff. 

The auction process may entail a series of auction attempts. In the first round, there is an attempt to auction the real estate at the appraised value at the time of the application for mortgage (for which the appraisal was originally ordered). Currently, market conditions are such that ordinarily appraisals conducted in the recent past are not reflective of today's pricing, which is generally lower. For this reason, it is usually the case that the real estate is not sold in the first round, as buyers are not likely to want to pay inflated prices.

If  there is no buyer found in the first round, then a second round auction is organized, in which the real estate is offered at 75 percent of the appraised value. If both the first and second round of attempted auctions fail, then a third round is organized at which the starting price is 60 percent of the appraised value, again based on the appraisal originally procured as support for the mortgage application.

What happens if there is no purchaser after all three auction rounds? In such case the creditor for whose benefit the security is being sold is entitled to take over the asset. 
The proceeds of sale are first disbursed to cover the expenses for execution of judgment and only thereafter are amounts disbursed to cover the debt principal and interest.

If the proceeds of sale on auction are insufficient to cover the debt, the bank may seek to collect the shortfall on the basis of a court issued collection order and proceed with a garnishment of wages and encumbrance of other assets of the debtor. This is the case even if the mortgage is silent on the issue of shortfalls, because it is under the authority of the Civil Law of Latvia that the shortfalls can be collected from the debtor's remaining assets and income, and so the creditor does not have to rely upon the mortgage document for the authority to pursue other avenues for collection of shortfalls.

Of course co-signers and guarantors may also expect a visit from the court bailiff if there is a shortfall, and their respective assets and income sources are also thereby at risk.
 The execution order can be issued within 10 years of the date of the court order. Execution of a Latvian judgment may also be enforced in other EU jurisidictions, where the debtor or co-signer or guarantor may also have assets. 

Elina Rubeze is a Senior Associate at  Kronbergs & Cukste.  Kronbergs & Cukste is a co-founder of Baltic Legal Solutions, a pan-Baltic legal services provider represented by Jurevicius, Balciunas & Bartkus in Lithuania and Glickman & Partnerid in Estonia.